Can new progressive era rise from ashes of ‘era of obstructionism’ or is the descent of US democracy just beginning?

- Jon Queally, staff writer

Republican senator from Texas, Ted Cruz. (Photo: AP)

“All of this was predictable.”

In the midst of the ongoing government shutdown—with the GOP still trying their darndest to kill Obamacare and the global financial markets now truly jittery over the quite real possibility of a US default—those five words, found in Paul Krugman’s Monday New York Times column, don’t say it all, but they begin to tell a story long in the making.

If the current situation in Washington is a consternation to many observers, why so predictable to progressives and others like Krugman? He writes:

It has been obvious for years that the modern Republican Party is no longer capable of thinking seriously about policy. Whether the issue is climate change or inflation, party members believe what they want to believe, and any contrary evidence is dismissed as a hoax, the product of vast liberal conspiracies.

For a while the party was able to compartmentalize, to remain savvy and realistic about politics even as it rejected objectivity everywhere else. But this wasn’t sustainable. Sooner or later, the party’s attitude toward policy — we listen only to people who tell us what we want to hear, and attack the bearers of uncomfortable news — was bound to infect political strategy, too.

In short, when an individual—or a political party—commits to a world view fundamentally insulated from reality, it is only a matter of time before the wheels will come off the rails. Like a pathological liar, the truth finally catches up. For a gambling addict, the house will ultimately call the game.

Over the weekend, the takeaway news was that Speaker of the House Rep. John Boehner (R-OH) was either “lying” or “incompetent” when he claimed on a Sunday talk show that he didn’t have the votes to pass a “clean CR” (continuing resolution) that would end the shutdown by funding the government without GOP riders or demands. The problem, of course—as many reporters and observers documented—was that it just wasn’t factually true.

Democrats have repeatedly called on Boehner to allow a vote on a so-called “clean” Senate bill that would reopen the government for a short period of time, but not include Republican demands to delay or defund ObamaCare.

A whip count by The Washington Post found that 20 Republican representatives supported a so-called clean continuing resolution (CR), with another four counted as “leaning yes.” If all 200 Democrats voted for the legislation, they would need just 17 Republicans to vote with them.

Boehner made the comment during an interview on ABC’s “This Week,” after host George Stephanopoulos asked him if he was “prepared to schedule a clean bill on government funding.”

When Stephanopoulos pressed Boehner on whether it was true that the votes did not exist, the Speaker said that the American people expected leaders in Washington to “sit down and have a conversation.”

So what’s at stake? According to Bloomberg on Monday, a voluntary default by the U.S. on its debt obligations would be “catastrophic” and lead to worse consequences than when the collapse of Lehman Brothers helped facilitate the financial crisis that swept the globe in 2008. The business paper reports:

Failure by the world’s largest borrower to pay its debt — unprecedented in modern history — will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.

The $12 trillion of outstanding government debt is 23 times the $517 billion Lehman owed when it filed for bankruptcy on Sept. 15, 2008. As politicians butt heads over raising the debt ceiling, executives from Berkshire Hathaway Inc.’s Warren Buffett to Goldman Sachs Group Inc.’s Lloyd C. Blankfein have warned that going over the edge would be catastrophic.

If nothing else, that’s a view of how the global capitalists see the situation. But what it also reveals is confirmation of the argument presented by many that the modern day Republican Party has become hostage to its most radical and destructive elements. Once beholden to serve the leaders of global capitalism, the new Republican Party, dominated by the branding and rhetoric of the Tea Party, has seemingly lost its ability to even know what that is.

Chris Hedges, a freelance journalist and author of the American Fascists: The Christian Right and the War on America, writes on Monday, the rise in prominence of Sen. Ted Cruz of Texas is the best example of how the ‘Christian right’ and its “anti-Enlightenment” word view has taken over the party and in its lust for power, sabotaged the country’s ability to govern itself. On the ideology of Cruz and his followers, which he terms ‘American fascism,’ Hedges writes:

They live in a binary world of black and white. They feel they are victims, surrounded by sinister groups bent on their destruction. They have anointed themselves as agents of God who alone know God’s will. They sanctify their rage. This rage lies at the center of the ideology. It leaves them sputtering inanities about Barack Obama, his corporate-sponsored health care reform bill, his alleged mandated suicide counseling or “death panels” for seniors under the bill, his supposed secret alliance with radical Muslims, and “creeping socialism.” They see the government bureaucracy as being controlled by “secular humanists” who want to destroy the family and make war against the purity of their belief system. They seek total cultural and political domination.

All ideological, theological and political debates with the radical Christian right are useless. It cares nothing for rational thought and discussion. Its adherents are using the space within the open society to destroy the open society itself. Our naive attempts to placate a movement bent on our destruction, to prove to it that we too have “values,” only strengthen its supposed legitimacy and increase our own weakness.

It is a mixture of this religious politics, combined with the financial self-interest of billionaires and ideologues—like “the Koch brothers, the political arm of the Heritage Foundation and others” described by Krugman—that fuels the current crisis. And though many step back and call the whole thing “political theater,” the final act has yet to begin.

What was “predictable,” according to Krugman, was that the GOP would ultimately end up in such a position where their aversion to facts would make them victims of reality. What is not yet clear—though predictions abound—is how the current impasse ends and what impact it will have on U.S politics leading into the 2014 election season and beyond.

With the Democratic Party also guilty in propping up a political system that fails to deliver the transformative change demanded by a world awash in war, economic inequality, and on the precipice of runaway climate change, the prospects for a new progressive era originating in Washington, DC are not only dim, but non-existent.

As Charles P. Pierce writes at Esquire on Monday morning, both parties—despite all warnings by social activists, progressives and Keynesian economists—have already agreed on austerity as a cure for the ongoing recession.

“For all the talk about how Republican extremism is finally catching up with the party,” writes Pierce, “one can argue just as well that Wall Street-friendly, deficit-hawk, DLC-onomics is finally catching up with the Democratic party.” He continues:

After all, if the shutdown ended tomorrow, the sequester would still be in place. Austerity still would be the tacitly agreed upon program for both parties, and Paul Krugman likely still would be drinking before noon. The administration’s brilliant eleventy-dimensional chess in 2010 looks more and more like a case of being too smart by half. It created a new reality in which both sides decided that what a country barely out of a devastating recession really needed was some belt-tightening and some fiscal discipline.

And Richard Eskow, from Campaign for America’s Future, writes, “The Democrats have already made too many concessions.” What’s needed, he says, is “for the people to take their government back from the extremists, before their empire collapses and takes us all down with it.”

And Eskow gets no quarrel from Hedges, who writes:

The rise of Christian fascism is aided by our complacency. The longer we fail to openly denounce and defy bankrupt liberalism, the longer we permit corporate power to plunder the nation and destroy the ecosystem, the longer we stand slack-jawed before the open gates of the city waiting meekly for the barbarians, the more we ensure their arrival.

For the moment, however, how this “impasse” ends—and what rises in its ugly wake—continues to be a guess.

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Democracy 2.0: Iceland crowdsources new constitution

In
just three years, Iceland went from collapse to revolution and back to
growth. What can Spain and Greece learn from the Icelandic experience
and its embrace of direct democracy?

Just two or three years after its economy and government collapsed, Iceland is bouncing back with remarkable strength. This week, the small island nation earned praise
from foreign investors despite allowing its banks to collapse and
refusing to pay back some of its debt — belying the dominant idea among
Europe’s ruling class that bank failures and defaults necessarily engender disastrous economic consequences.

Now,
in an historically unprecedented move, the government has decided to
draft a new constitution with the online input of its citizens —
essentially crowdsourcing
the creation of Iceland’s real democracy. Rather than just involving
voters at the end of the process through a referendum, the Icelanders
have an opportunity, through social media, to be directly involved in
the writing process. It’s the ultimate affirmation of participatory
democracy. It’s Democracy 2.0.

How did Iceland get from there to here? And what are the lessons for Europe’s troubled periphery?

Back in 2009, months after the greatest banking collapse in economic history, the people of Iceland took to the streetsen masse to
denounce the reckless bankers who had caused the crisis and the
clueless politicians who had allowed it to develop. Quietly, as the
world was busy watching the inauguration of President Obama, the people
of Iceland overthrew their government and demanded a referendum on the country’s debt.

In
the referendum, the Icelanders decided not to repay foreign creditors —
Great Britain and the Netherlands — who had so foolishly deposited
their savings in one of the world’s most over-leveraged banks, Icesave.
In fact, the President had already vetoed
the deal, so the referendum was largely symbolic, but still, the
outcome of the vote (93 percent against repayment) was a watershed in
the epic battle between people power and foreign financial interests.

Yet
what’s really interesting about the Icelandic case is not just the
referendum, but the fact that the consequences of the outcome were far
from being as disastrous
as Europe’s self-proclaimed economic ‘experts’ had predicted. In fact,
within just two years of the collapse of its government, Iceland is
bouncing back rapidly, and is actually being rewarded for it by foreign
investors. As the Wall Street Journal reported yesterday:

Iceland’s
first international bond offering since its spectacular economic and
banking collapse late in 2008 has been snapped up by investors. The
five-year $1 billion deal, yielding just under 5%, is a milestone in
rebuilding confidence internationally and follows a turnaround in the
economy, forecast to grow 2.25% this year.

So it’s no surprise that Iceland became a rallying point for the ‘indignados‘
in Spain during the mass protests that broke out there last month.
Spanish demonstrators could be seen carrying placards reading “Iceland
is my goal” and “I think of Iceland.” The Icelandic model has also come
to inspire the indignant protest movement in Greece, which is rapidly picking up steam. So what are Iceland’s main lessons for Europe’s troubled periphery?

First of all, make sure to read this excellent piece
by Robert Wade, my former Professor at the London School of Economics,
to understand how Iceland’s mistakes in the lead-up to the crisis were
just an extreme version of what we did on the continent: capital account
liberalization combined with financial deregulation and unprecedented
political disinterest in the face of an epic bubble blowing up right in
front of our eyes.

Wade helps us understand what not to do. But perhaps at this stage, it’s more interesting to find out what we should do. In
this respect, one overwhelming lesson jumps out: while letting banks
collapse and refusing to pay back foreign lenders certainly has negative
consequences in the short run, those consequences are born largely by
the reckless bankers who instigated the crisis in the first place.

Instead
of socializing the losses of the banks, making ordinary people pay for a
crisis they never caused, the Icelandic model forced the bankers to pay
for their own stupidity. During the Icelandic crisis, all three of the
country’s largest banks collapsed. The government didn’t save them.

Secondly, Iceland actually went after
those responsible — both to enact justice and to set a precedent that
this type of reckless speculation on the livelihoods of real people will
simply not be tolerated in the future. Key figures in the banking
sector have been arrested and a former prime minister has been formally charged. Treating reckless speculation as a crime is a crucial first step towards real democracy.

Thirdly, Iceland did what no one is supposed to be doing according to neoliberal dogma: just like Malaysia did — to the dismay of the IMF — during the East-Asian crisis of 1997-’98, the Icelandic government instituted capital controls
to stem the outflow of hot money from the country in the wake of its
banking collapse. The EU should have done the same (and can still do the
same) to stem the outflow of capital from the periphery.

Fourthly, and this is obviously the most crucial lesson of all, the people of Iceland managed to sever the neoliberal straitjacket
that had kept their politicians enthralled to the interests of the
financial sector for so long. Through mass mobilization, the people
toppled the government and instituted a radically new form of political
participation. The crowdsourcing of the constitution is the most
powerful symbol this new, real democracy.

As a result, the Icelandic people are now slowly but surely beginning to recover
from the worst ever economic collapse of any country during
peacetime. By contrast, countries like Greece, Spain, Ireland and
Portugal are still struggling — and likely to remain mired in deep
recession, if not outright depression, for years to come.

Untold suffering and hardship
will fall on millions of people as the ECB, IMF and Germany continue to
expect full repayment while imposing draconian (and ultimately
counterproductive) austerity measures. A lost generation
will flee these countries in a desperate search for opportunity.
Countless lives, businesses, families and dreams will be destroyed. And
for what? A handful of bankers who refuse to take a haircut?

What Iceland teaches us is that it need not be that way. The Atlantic currents and Arab winds have already reached
the European periphery. It’s just a matter of time before the first
government on the continent will be toppled by its people. Democracy 2.0
is on its way. No one can stop it now.

–>An Italian radio program’s st0ry about Iceland’s on-going revolution is a
stunning example of how little our media tells us about the rest of the world.
Americans may remember that at the start of the 2008 financial crisis, Iceland
literally went bankrupt. The reasons were mentioned only in passing, and since
then, this little-known member of the European Union fell back into
oblivion.

As one European country after another fails or risks failing, imperiling the
Euro, with repercussions for the entire world, the last thing the powers that be
want is for Iceland to become an example. Here’s why:

Five years of a pure neo-liberal regime had made Iceland, (population 320
thousand, no army), one of the richest countries in the world. In 2003 all the
country’s banks were privatized, and in an effort to attract foreign investors,
they offered on-line banking whose minimal costs allowed them to offer
relatively high rates of return. The accounts, called IceSave, attracted many
English and Dutch small investors. But as investments grew, so did the banks’
foreign debt. In 2003 Iceland’s debt was equal to 200 times its GNP, but in
2007, it was 900 percent. The 2008 world financial crisis was the coup de
grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went
belly up and were nationalized, while the Kroner lost 85% of its value with
respect to the Euro. At the end of the year Iceland declared bankruptcy.

Contrary to what could be expected, the crisis resulted in Icelanders
recovering their sovereign rights, through a process of direct participatory
democracy that eventually led to a new Constitution. But only after much
pain.

Geir Haarde, the Prime Minister of a Social Democratic coalition government,
negotiated a two million one hundred thousand dollar loan, to which the Nordic
countries added another two and a half million. But the foreign financial
community pressured Iceland to impose drastic measures. The FMI and the
European Union wanted to take over its debt, claiming this was the only way for
the country to pay back Holland and Great Britain, who had promised to reimburse
their citizens.

Protests and riots continued, eventually forcing the government to resign.
Elections were brought forward to April 2009, resulting in a left-wing coalition
which condemned the neoliberal economic system, but immediately gave in to its
demands that Iceland pay off a total of three and a half million Euros. This
required each Icelandic citizen to pay 100 Euros a month (or about $130) for
fifteen years, at 5.5% interest, to pay off a debt incurred by private parties
vis a vis other private parties. It was the straw that broke the reindeer’s
back.

What happened next was extraordinary. The belief that citizens had to pay for
the mistakes of a financial monopoly, that an entire nation must be taxed to pay
off private debts was shattered, transforming the relationship between citizens
and their political institutions and eventually driving Iceland’s leaders to the
side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused
to ratify the law that would have made Iceland’s citizens responsible for its
bankers’ debts, and accepted calls for a referendum.

Of course the international community only increased the pressure on Iceland.
Great Britain and Holland threatened dire reprisals that would isolate the
country. As Icelanders went to vote, foreign bankers threatened to block any
aid from the IMF. The British government threatened to freeze Icelander savings
and checking accounts. As Grimsson said: “We were told that if we refused the
international community’s conditions, we would become the Cuba of the North.
But if we had accepted, we would have become the Haiti of the North.” (How many
times have I written that when Cubans see the dire state of their neighbor,
Haiti, they count themselves lucky.)

In the March 2010 referendum, 93% voted against repayment of the debt. The
IMF immediately froze its loan. But the revolution (though not televised in the
United States), would not be intimidated. With the support of a furious
citizenry, the government launched civil and penal investigations into those
responsible for the financial crisis. Interpol put out an international arrest
warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other
bankers implicated in the crash fled the country.

But Icelanders didn’t stop there: they decided to draft a new constitution
that would free the country from the exaggerated power of international finance
and virtual money. (The one in use had been written when Iceland gained its
independence from Denmark, in 1918, the only difference with the Danish
constitution being that the word ‘president’ replaced the word ‘king’.)

To write the new constitution, the people of Iceland elected twenty-five
citizens from among 522 adults not belonging to any political party but
recommended by at least thirty citizens. This document was not the work of a
handful of politicians, but was written on the internet. The constituent’s
meetings are streamed on-line, and citizens can send their comments and
suggestions, witnessing the document as it takes shape. The constitution that
eventually emerges from this participatory democratic process will be submitted
to parliament for approval after the next elections.

Some readers will remember that Iceland’s ninth century agrarian collapse was
featured in Jared Diamond’s book by the same name. Today, that country is
recovering from its financial collapse in ways just the opposite of those
generally considered unavoidable, as confirmed yesterday by the new head of the
IMF, Christine Lagarde to Fareed Zakaria. The people of Greece have been told
that the privatization of their public sector is the only solution. And those
of Italy, Spain and Portugal are facing the same threat.

They should look to Iceland. Refusing to bow to foreign interests, that small
country stated loud and clear that the people are sovereign.

We have a remarkable ability to create our own monsters. A few decades of meddling in the Middle East with our Israeli doppelgänger and we get Hezbollah, Hamas, al-Qaida, the Iraqi resistance movement and a resurgent Taliban. Now we trash the world economy and destroy the ecosystem and sit back to watch our handiwork. Hints of our brave new world seeped out Thursday when Washington’s new director of national intelligence, retired Adm. Dennis Blair, testified before the Senate Intelligence Committee. He warned that the deepening economic crisis posed perhaps our gravest threat to stability and national security. It could trigger, he said, a return to the “violent extremism” of the 1920s and 1930s.

It turns out that Wall Street, rather than Islamic jihad, has produced our most dangerous terrorists. You wouldn’t know this from the Obama administration, which seems hellbent on draining the blood out of the body politic and transfusing it into the corpse of our financial system. But by the time Barack Obama is done all we will be left with is a corpse—a corpse and no blood. And then what? We will see accelerated plant and retail closures, inflation, an epidemic of bankruptcies, new rounds of foreclosures, bread lines, unemployment surpassing the levels of the Great Depression and, as Blair fears, social upheaval.

The United Nations’ International Labor Organization estimates that some 50 million workers will lose their jobs worldwide this year. The collapse has already seen 3.6 million lost jobs in the United States. The International Monetary Fund’s prediction for global economic growth in 2009 is 0.5 percent—the worst since World War II. There are 2.3 million properties in the United States that received a default notice or were repossessed last year. And this number is set to rise in 2009, especially as vacant commercial real estate begins to be foreclosed. About 20,000 major global banks collapsed, were sold or were nationalized in 2008. There are an estimated 62,000 U.S. companies expected to shut down this year. Unemployment, when you add people no longer looking for jobs and part-time workers who cannot find full-time employment, is close to 14 percent.

And we have few tools left to dig our way out. The manufacturing sector in the United States has been destroyed by globalization. Consumers, thanks to credit card companies and easy lines of credit, are $14 trillion in debt. The government has pledged trillions toward the crisis, most of it borrowed or printed in the form of new money. It is borrowing trillions more to fund our wars in Afghanistan and Iraq. And no one states the obvious: We will never be able to pay these loans back. We are supposed to somehow spend our way out of the crisis and maintain our imperial project on credit. Let our kids worry about it. There is no coherent and realistic plan, one built around our severe limitations, to stanch the bleeding or ameliorate the mounting deprivations we will suffer as citizens. Contrast this with the national security state’s strategies to crush potential civil unrest and you get a glimpse of the future. It doesn’t look good.

“The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications,” Blair told the Senate. “The crisis has been ongoing for over a year, and economists are divided over whether and when we could hit bottom. Some even fear that the recession could further deepen and reach the level of the Great Depression. Of course, all of us recall the dramatic political consequences wrought by the economic turmoil of the 1920s and 1930s in Europe, the instability, and high levels of violent extremism.”

The specter of social unrest was raised at the U.S. Army War College in November in a monograph [click on Policypointers’ pdf link to see the report] titled “Known Unknowns: Unconventional ‘Strategic Shocks’ in Defense Strategy Development.” The military must be prepared, the document warned, for a “violent, strategic dislocation inside the United States,” which could be provoked by “unforeseen economic collapse,” “purposeful domestic resistance,” “pervasive public health emergencies” or “loss of functioning political and legal order.” The “widespread civil violence,” the document said, “would force the defense establishment to reorient priorities in extremis to defend basic domestic order and human security.”

“An American government and defense establishment lulled into complacency by a long-secure domestic order would be forced to rapidly divest some or most external security commitments in order to address rapidly expanding human insecurity at home,” it went on.

“Under the most extreme circumstances, this might include use of military force against hostile groups inside the United States. Further, DoD [the Department of Defense] would be, by necessity, an essential enabling hub for the continuity of political authority in a multi-state or nationwide civil conflict or disturbance,” the document read.

In plain English, something bureaucrats and the military seem incapable of employing, this translates into the imposition of martial law and a de facto government being run out of the Department of Defense. They are considering it. So should you.

Adm. Blair warned the Senate that “roughly a quarter of the countries in the world have already experienced low-level instability such as government changes because of the current slowdown.” He noted that the “bulk of anti-state demonstrations” internationally have been seen in Europe and the former Soviet Union, but this did not mean they could not spread to the United States. He told the senators that the collapse of the global financial system is “likely to produce a wave of economic crises in emerging market nations over the next year.” He added that “much of Latin America, former Soviet Union states and sub-Saharan Africa lack sufficient cash reserves, access to international aid or credit, or other coping mechanism.”

“When those growth rates go down, my gut tells me that there are going to be problems coming out of that, and we’re looking for that,” he said. He referred to “statistical modeling” showing that “economic crises increase the risk of regime-threatening instability if they persist over a one to two year period.”

Blair articulated the newest narrative of fear. As the economic unraveling accelerates we will be told it is not the bearded Islamic extremists, although those in power will drag them out of the Halloween closet when they need to give us an exotic shock, but instead the domestic riffraff, environmentalists, anarchists, unions and enraged members of our dispossessed working class who threaten us. Crime, as it always does in times of turmoil, will grow. Those who oppose the iron fist of the state security apparatus will be lumped together in slick, corporate news reports with the growing criminal underclass.

The committee’s Republican vice chairman, Sen. Christopher Bond of Missouri, not quite knowing what to make of Blair’s testimony, said he was concerned that Blair was making the “conditions in the country” and the global economic crisis “the primary focus of the intelligence community.”

The economic collapse has exposed the stupidity of our collective faith in a free market and the absurdity of an economy based on the goals of endless growth, consumption, borrowing and expansion. The ideology of unlimited growth failed to take into account the massive depletion of the world’s resources, from fossil fuels to clean water to fish stocks to erosion, as well as overpopulation, global warming and climate change. The huge international flows of unregulated capital have wrecked the global financial system. An overvalued dollar (which will soon deflate), wild tech, stock and housing financial bubbles, unchecked greed, the decimation of our manufacturing sector, the empowerment of an oligarchic class, the corruption of our political elite, the impoverishment of workers, a bloated military and defense budget and unrestrained credit binges have conspired to bring us down. The financial crisis will soon become a currency crisis. This second shock will threaten our financial viability. We let the market rule. Now we are paying for it.

The corporate thieves, those who insisted they be paid tens of millions of dollars because they were the best and the brightest, have been exposed as con artists. Our elected officials, along with the press, have been exposed as corrupt and spineless corporate lackeys. Our business schools and intellectual elite have been exposed as frauds. The age of the West has ended. Look to China. Laissez-faire capitalism has destroyed itself. It is time to dust off your copies of Marx.

(This is an article I wrote (October 5, 1999) and submitted somewhere, I don’t remember.In any case it was rejected.It summarizes Ecuador’s political and economic climate and suggests that it might be a paradigm for the rest of Latin America.)

Whereas the vast majority of Ecuadorians would not know what a Brady Bond is any more than they could identify the Brady Bunch, it can only be fear of violent Ecuadorian public reaction to further “belt tightening” measures that prompted the fundamentally conservative center-right government of President Jamie Mahuad to default on $44.5 million in Brady Bond interest payments earlier this month.While Ecuador may be one of the smallest and least economically developed amongst its Latin American neighbors and thereby easily dismissed as not comparable to the economic “giants” such as Brazil, Mexico or Argentina, to overlook the significance of this event for that reason is to ignore a continent-wide unrest of which Ecuador is as representative as any other Latin American republic.

The relatively mild international reaction to Ecuador’s unprecedented action would indicate that the world banking community is convinced that the tail is not likely to wag the dog.This, on the one hand, overlooks several key characteristics that Ecuador shares with its Latin American neighbors – large gaps between rich and poor, entrenched governmental corruption and instability, deep poverty, small and shrinking middle classes, overwhelming external debt, and dependency upon unstable world commodity markets.More importantly, it fails to take into account the single most critical factor that economists love to under-rate: the angry passions of desperate masses.

Ecuador is blessed with abundant natural resources.It is the world’s largest exporter of bananas and is also a major producer of cocoa, coffee, fresh flowers, coconut, pineapple, rice, and sugar cane.Its offshore and inland fishing industry yields massive quantities of lobster, shrimp, tuna, tilapia, and other high demand seafood products.The discovery of large oil deposits in its tropical rainforests in the 1970’s has thrust Ecuador amongst the leading petroleum producing nations of the Americas.The same Oriente region is potentially rife with precious metals such as silver and gold.With such natural riches, a diversity of bio-geographic regions (tropical rainforest, the Andes cordillera, lush coastal plains, and the Galápagos Islands) that is amenable to high yield agriculture and aquaculture production as well as regional and international tourism, and with a small population of just under thirteen million, Ecuador should be among the wealthiest nations on earth.

Yet, it is one of the poorest and it suffers perpetual economic crisis.Ecuador has both the highest inflation rate and per capita external debt in all Latin America.It has high rates of infant mortality and illiteracy that reflect a minimal public investment in health and education.Nearly one quarter of its adult population is unemployed and half of those employed are underemployed, managing a bare existence by selling everything from hard candy to tropical fruit, tooth paste to toilet paper, on city streets.The poverty rate is estimated at 80 per cent, with more than half of that considered to be deep poverty.It is not uncommon to see children as young as four and five years of age begging and/or working on the streets of Guayaquil, a seaport of over two million inhabitants, which is the country’s largest city and which suffers from a dilapidated infrastructure, disease epidemic due to inadequate sanitation, air and water pollution, and which is experiencing the proliferation of bamboo housing slums on its borders due to the influx of refugees from even more severe rural poverty.

Ecuador returned to constitutional government after a military dictatorship that lasted throughout the 1970’s.Its political culture is characterized by corruption, greed and incompetence.Its judicial system is almost entirely politicized.Over a dozen political parties jockey for power, and the inability of the legislative and executive branches to find common ground leaves the country in a state of almost perpetual political paralysis.There is constant labor strife, fueled, among other things, by the fact that government workers, particularly teachers and health workers whose salaries are embarrassing low to begin with, are compelled to initiate work stoppages to force government ministries to release their pay checks, which are often several months in arrears.In addition, there is chronic unrest amongst students, petroleum and utilities workers, Indigenous peoples and campesinos, and other sectors of society as a result unpopular policies that are perceived as throwing the burden of economic crisis on the backs of the poorest and most vulnerable members of society.Even the Catholic Church, despite its essentially conservative nature, often finds itself along side more traditional dissidents in chastising the government.

In 1996, Abdalá Bucaram, a demagogic andunbelievably vulgar “populist,” representing a party withleft wing rhetoric and right wing policies, won the presidency and ring-mastered a governmental circus that was overthrown by a Congress-led, military supported and bloodless coup d’etat which followed two days of massive nation-wide general strike in February of1997.With more than a bit of theatric irony, Bucaram, who proudly calls himself El Loco, was ousted by the Ecuadorian Congress on the constitutional ground of “mental incompetence,”and went into exile in Panama. Immediately, the Congress, in violation of the constitution, appointed its own leader, Fabian Alarcón, as interim president, bypassing the legitimate successor, the elected Vice President, Rosalía Arteaga, who had the misfortune to have been born of the wrong gender.

In August of 1998, under the banner of the center-right Popular Democracy party, Jamil Mahuad, a former mayor of Quito, Ecuador’s capital city, began a four year presidential term, having barely edged out Alvaro Noboa, heir to Ecuador’s largest banana fortune and the country’s wealthiest individual, a man with no prior political experience other than an appointed position in the government of Bucaram, who would no doubt have returned from exile should Noboa have won.Mahuad proceeded to implement a “paquetizo,” a package of economic policies far more stringent and devastating than those proposed by and which lead to the ouster of Bucaram.By mid-1999 the government had more than doubled the price of gasoline, devalued the currency, and raised the cost of public utilities as much as five hundred percent.A nation-wide banking crisis in the spring had lead to a week-long closure of all banks and was followed by the freezing of bank accounts.Hundreds of thousands of Ecuadorians lost their life savings.Things came to a head in early July, when a two day general strike called for by transportation workers ended up shutting down Ecuador’s inter-regional transportation for nearly two weeks.

The only political party in Ecuador with representation in Congress that as a matter of policy advocates the cessation of external debt payments is the Marxist-Leninist oriented Movement for Popular Democracy (MPD), which draws its major support from the teachers’ union and middle class professionals.A handful of so-called “center-left” parties, who always morph into center-right should they capture the presidency, will sometimes echo such demand while in opposition.However, nothing less than extraordinary circumstances can explain the unilateral withholding of a scheduled debt payment, particularly when such an action is taken by a government with no pretence toward or prior history of radicalism.

It is interesting to note that Ecuador is not among those countries for which the IMF is seriously considering the forgiving of past debt.Ostensibly this is because of Ecuador’s relative “wealth,” which fails to take into account its skewed distribution, and because of the endemic corruption within the political process.However, even if Ecuador were to be magically freed of the Albatross of external debt, apart from some undeniable short term benefit, this would not begin to solve the structural problems that lie at the root of the nation’s tragic history.

Crippling external debt is the symptom not the cause of Ecuador’s woes, and it can be argued that the same is substantially the same for virtually every Latin American nation.In short, given its history of external resource exploitation which presents us with today’s reality, a reality characterized by brutal discrepancies in the distribution of wealth and an overall dearth of both physical infrastructure (roads, utilities, sanitation) and social infrastructure (health, education, democratic government), Ecuador simply is not a viable political/economic unit. As government after government has proven, no amount of reform, be it of the strong armed neo-Liberal variety, which is the current style, or the more traditional borrow and spend (or steal) it variety, will get to the root of the problem.

Ecuador lacks a responsible leadership class.Election to public office is considered tantamount to a license to accumulate wealth.Presidents, Vice-Presidents, and Congressmen who leave office are almost as likely to go into exile in Panama, Chile, Costa Rica or Miami as they are to return to private life in Ecuador.There is no sense amongst Ecuadorians that its crisis can be solved at the political level as it presently exists.An example of this was the Popular Assembly, a by-product of the February 1997 uprising that lead to the ouster of Bucaram, which was seen as a way to reform the Constitution over the head of the Congress, which was considered too mired in corruption to achieve meaningful change.The interim government, however, set the ground rules for the Assembly, which resulted in the existing political parties being able to get their loyal supporters elected to and in control of the Assembly, which in turn produced nothing that constituted genuine change.

On the other hand, one does find in Ecuador a relatively strong union movement, militant teachers, angry students, a highly organized and effective Indigenous movement, a nascent and growing women’s movement, a discontented and fearful professional class, and millions of suffering and disillusioned “ordinary people.”Like the Guagua Pinchincha volcano, which as been on low boil for nearly a year and only this week has begun to spew tons of ash and dust over nearby Quito, the repressed and volcanic passions of this small but not atypical Latin nation may erupt at any moment, and without warning.

When the government of Ecuador failed to make a scheduled interest payment on private bonds today, it was hardly the first time a country had defaulted in the middle of a financial crisis. In fact, it wasn’t even the first time for Ecuador. The small South American country did so just 10 years ago, at a time when the economy was reeling from natural disasters and a drop in oil prices.

But this default is different. For the first time in history, the government’s defense isn’t based on an inability to pay. Ecuadorian President Rafael Correa explained rather that he was unwilling to continue to pay debts that are “obviously immoral and illegitimate.”

Like many of the victims of the U.S. subprime mortgage mess, the Ecuadorian people were the targets of predatory lending. In the 1970s, unscrupulous international lenders facilitated some $3 billion in borrowing by Ecuadorian dictators who blew most of the money on the military. After the transition to democracy, the Ecuadorian people got stuck holding the bag.

Over the years, the country has made debt payments that exceed the value of the principal it borrowed, plus significant interest and penalties. But after multiple reschedulings, conversions, and some further borrowing, Ecuador’s debt has risen to more than $10 billion today.

Human Costs

The human costs are staggering. Every dollar sent to international creditors means one dollar less is available for fighting poverty. And in 2007, the Ecuadorian government paid $1.75 billion in debt service, more than it spent on health care, social services, the environment, and housing and urban development combined.

Correa campaigned on a commitment to prioritize the payment of the “social debt” over financial debt. After taking office in 2007, he responded to demands from Ecuadorian civil society and the international Jubilee Network to form an independent commission to investigate the origins, nature, and impacts of the nation’s external debt. While citizens’ groups in other countries have carried out their own debt audits, this was the first time a government had supported such an effort.

The debt audit commission documented hundreds of allegations of irregularity, illegality, and illegitimacy in the contraction of Ecuador’s debt. In the case of the bonds Ecuador has now defaulted on, the commission alleged that they were issued and restructured illegally, violating Ecuador’s domestic laws, U.S. Securities and Exchange Commission regulations, and general principles of international law. The agreement that gave rise to the Global bonds themselves may not be legal under Ecuador’s constitution, which prohibits an individual from incurring debt on behalf of the country.

Commercial debt is the most expensive component of Ecuador’s portfolio, making up only 30% of its total obligations but comprising 44% of the country’s interest payments in 2007.

Correa says he hopes to cut a deal with creditors, much in the way that many U.S. homeowners are seeking to restructure their subprime mortgages. Ecuador’s global bonds are currently valued at $3.8 billion. If negotiations aren’t fruitful, however, the economic repercussions could be severe.

One avenue for the bondholders would be to sue under the U.S.-Ecuador bilateral investment treaty, which went into force in 1997 (long before Correa took office). Arbitration tribunals, such as the World Bank-affiliated International Centre for the Settlement of Investment Disputes (ICSID), handle such cases. Under this system, there is no public accountability, no standard judicial ethics rules, and no appeals process. A group of Italian investors has a pending ICSID claim over about $5.5 billion in bonds that Argentina defaulted on in 2002.

Investors could also sue in New York courts, as the bonds were issued under the laws of that state. Holders of Argentine bonds have also used that tactic.

Financial analysts have also predicted that Ecuador’s default will cut off the country’s access to capital markets and could dim its chances of obtaining a long-term extension of U.S. trade preferences, which will expire in 2008.

While the risks of default are high, Ecuador had only two options: keep paying a dubious and possibly illegal debt at the risk of social unrest, or default and face the wrath of the international markets.

Independent Mechanism

This exposes a gaping hole in the international financial system: the lack of an international, independent mechanism for countries to resolve disputes over potentially illegitimate and/or illegal debt or in the case of bankruptcy. Ecuador may be the first developing country to default during the current crisis, but it’s unlikely to be the last.

As world leaders seek to build a new international financial architecture to respond to the current meltdown and prevent future crises, they should consider a new debt workout mechanism as one key pillar.

A bill pending in the U.S. Congress would be a step forward. The Jubilee Act, which passed the House of Representatives in 2008, would require the Comptroller General to undertake audits of the debt portfolios of previous regimes where there is substantial evidence of odious, onerous, or illegal loans. The legislation also instructs the Secretary of the Treasury to “seek the international adoption of a binding legal framework on new lending that…provides for decisions on irresponsible lending to be made by an entity independent from the creditors; and enables fair opportunities for the people of the affected country to be heard.”

To ensure more responsible and productive lending and borrowing in the future, we need to learn from and redress the errors of the past. Only then can we build the architecture for an international financial system that works for people and the planet.

Neil Watkins, a Foreign Policy In Focus contributor, is the executive director of Jubilee USA Network, and Sarah Anderson, a Foreign Policy In Focus senior analyst, is the director of the Global Economy Project at the Institute for Policy Studies.

COSTA DO SAUIPE, Brazil (Reuters) – Latin American leaders on Tuesday blamed the global economic crisis on rich countries and welcomed Communist-run Cuba at a summit meeting designed to weaken U.S. influence in the region.

The presence of Cuban President Raul Castro at the meeting in northeastern Brazil was touted as a sign of Latin America’s growing independence from the United States, a far cry from the Cold War era when Cuba was expelled from the Washington-based Organisation of American States.

“Cuba returns to where it always belonged. We’re complete, we’re forming a team, a good team,” said Venezuelan President Hugo Chavez, the region’s most vehement U.S. critic and Cuba’s closest ally.

“The most positive thing for the independence of our continent is that we meet alone without the hegemony of the empire,” Chavez said in reference to the United States.

Previous summits of Latin American and Caribbean leaders have always included former colonial powers Spain and Portugal or the United States.

Castro, on his first foreign trip since taking over from his ailing brother Fidel Castro earlier this year, said an unfair, world economic order benefiting rich countries and multinational companies was in crisis.

“It’s the demise of an economic model,” he said.

Cuba’s admission on Tuesday into the long-standing Rio Group of more than 20 Latin American and Caribbean countries brought renewed calls for an end to the U.S. embargo against Cuba.

Castro said on the eve of the summit meeting here that he was open to meeting with U.S. President-elect Barack Obama to discuss the issue.

PROGRESS AT RISK

The global crisis, which has cut off credit lines and hit demand for the commodity exports of many countries, has threatened to undo years of economic and social progress in the region, Brazil’s President Luiz Inacio Lula da Silva said.

“Crises like the current one reveal the perversities of the current economic system,” Lula said.

Ecuador’s President Rafael Correa, who defaulted on a foreign debt payment this week, said emerging market economies didn’t cause the crisis but would end up paying a high price for it.

He said Latin American countries should pool their international reserves and speed up the creation of a regional development bank to help overcome the global credit crunch.

“The answer is integration,” said Correa.

Leaders also agreed to create a South American defence council aimed at preventing local conflicts and reducing dependence on U.S. weaponry. Brazil is the largest arms manufacturer in South America and could gain ground against U.S. manufacturers if the region’s governments came together on some defence issues.

The newly-formed South American Union failed on Tuesday to agree on a secretary-general to lead it, and the regional customs union Mercosur failed to eliminate double taxation on imports that have held up negotiations with other trade blocs.

Paraguayan President Fernando Lugo said he was studying the legality of his country’s foreign debt, echoing the arguments made by Ecuador this week and raising the possibility of another default that would reinforce doubts about Latin America’s investment climate.

Once they were as gods, but the deities of the American banking system are now in ruins, plunged from their pedestals into the maw of taxpayer largesse. Congress voted to give the banks $700 billion, lifting them temporarily out of their sepulcher of debt, while revealing a deep truth about the condition of America’s financial powers:

They never had the money they said they had as they constructed their debt-based monetary system which now lies in ruins. Their decisions on behalf of depositors, shareholders and investors were lacking in basic integrity and common sense. Green gods bailing out with their golden parachutes.

There was a time when their power was real. Come with me to Cleveland 30 years ago today.

Dec. 15, 1978, Cleveland, Ohio

I awoke to find a curt payment demand that was dropped on my front step by a grandfatherly man who supplemented his Social Security delivering the morning newspaper. The headline plastered across the front page:

One of America’s largest banks, Cleveland Trust, led local banks in demanding immediate payment from the city by midnight, Dec. 15, of $14.5 million in short-term loans.

I regarded the headline skeptically. Having lived in 21 different places by the time I was 17, including a couple of cars, I had come to an encyclopedic knowledge of dun letters, sent to my parents by battalions of bill collectors seeking immediate payment for televisions, cars and a variety of household appliances that never seemed to work. I first came to regard these credit alarms with trepidation, later with impassiveness, with the expectation that as our family grew to two adults and seven children it would soon be on the move again, incurring new delinquencies with each new address. Lack of access to money, housing and credit seemed to be a permanent condition.

Now, having fought through a thicket of consequence to become America’s youngest mayor, elected on a promise to stop the privatization of the city’s electric system, I was faced with paying off loans taken out by the previous mayor, for the financing of municipal projects of dubious value.

The banks refused to extend terms of payment and connived with City Council members to block alternative payment plans, such as the sale of city land or tax revenues. The banks knew the city couldn’t otherwise pay. They demanded instead the sale of the city’s electric system, Muny Light, to an investor-owned electric company, the Cleveland Electric Illuminating Co. (CEI). The president of the Cleveland Council, George Forbes, had met with the head of Cleveland Trust bank, who insisted on the sale of Muny Light as a precondition for extending the city credit. This was a case of the bank blackmailing the city, pure and simple.

The alternative to accepting the bank’s blackmail was default. Cleveland could become the first city since the Depression to default on its financial obligations. Cities rely on credit for everyday operations and for meeting long-term financial obligations, such as infrastructure improvements. If banks called in their loans, the city would head toward dire straits. No one knew that better than the law firm of Squire Sanders and Dempsey, which had served as bond counsel for the city of Cleveland while the city entered fiscal peril and was simultaneously, though not coincidentally, the principal law firm for the Cleveland Electric Illuminating Co. Through Squire Sanders and Dempsey, CEI had access to the intricacies of the city of Cleveland’s financial records.

Under the previous administration, the city began using bond funds for general operating purposes. As mayor, I inherited $40 million worth of debt that had to be refinanced before the end of my first year in office. Under my predecessor, the city had illegally spent money it did not have, and yet it had the key to every bank in town and the confidence of the bond rating houses, at precisely the same time it was preparing for the sale of the municipal electric system to CEI.

Cleveland Trust and another bank demanding the sale of Muny Light, National City, were principal stock owners in CEI. Several members of CEI’s board sat on the boards of local banks as interlocking directorates. There was a myriad of bank-utility business relations. Cleveland Trust bank, which handled CEI’s demand deposits, pension funds and other assets, would directly profit from the sale of Muny Light. In a way, the banks were the private utility. With the sale, CEI would have an electricity monopoly in Cleveland and would be able to name its price for electricity and get it. Everyone in the Muny Light territory would receive at least a 20 percent rate increase as the rates would be raised to CEI’s levels.

The city was self-sufficient with Muny Light for many years. Muny provided power to 46,000 homes with low electric rates, which contributed to the economic growth of the city. That was until the late 1960s and early ’70s, when a series of suspicious mechanical failures and power outages diminished the system’s reliability. At that time, under heavy lobbying from CEI, the Cleveland City Council delayed the passage of legislation for $9.8 million in repairs to Muny Light’s generators, thereby forcing the city to purchase power at a premium from its competitor, CEI. The city became increasingly dependent on an interconnection between CEI and Muny Light, a high-voltage line over which power could be transferred from CEI to the city, to ensure reliability. The city’s power system began to experience more unexplained power failures. CEI began to make public overtures to purchase Muny Light. The sale of Muny Light to CEI was soon supported by most of Cleveland’s media, business, political and labor interests.

In November 1976, the City Council passed legislation authorizing the sale of Muny Light for a fraction of its value. I was clerk of Cleveland’s Municipal Court at the time and I objected to the sale. I was advised that there was no way to stop the sale, but I saw it differently. Cleveland had a long history of municipal power. I could sense a terrible injustice was being visited upon the people of the city by its leading institutions, which were conspiring to deprive the city of its public power system.

I organized a petition drive that attracted support from city neighborhoods served by Muny Light. A full civic campaign was born with an intense effort made under brutal weather conditions to gather the signatures necessary to put the issue on the ballot. There was much at stake besides the monetary value of the system: The people’s right to own an electric system. And the historic position of Muny Light, one of America’s first municipal electric utilities, founded 70 years earlier by Cleveland Mayor Tom Johnson. Muny Light provided electricity to about one-third of the homes and businesses in the city at a peak savings of 20-30 percent over the rates charged by CEI. Additionally, Muny Light provided millions of dollars annually in savings to taxpayers by serving 76 city facilities. It also provided Cleveland’s street lighting. High electric rates and higher taxes would follow if Muny were sold. The private sector was forcing the sale for its own profit at the expense of the community.

On Jan. 4, 1977, the Atomic Safety and Licensing Board (ASLB), in an antitrust review required of any company applying to operate a nuclear power plant, ruled that CEI had conspired to put Muny Light out of business. CEI tried to force Muny Light into price-fixing and blocked Muny expansion, stopped the installation of Muny Light pollution-abatement equipment and forced the city to buy power it didn’t need. In addition, the ASLB uncovered a CEI budget planning report for 1971 that spoke of a five-year plan “to reduce and ultimately eliminate” Muny Light.

The ASLB determined that CEI deliberately caused a Christmas-season blackout on the Muny Light system and sent salesmen into Muny Light territory offering “reliable CEI service.” The private utility illegally tripled the cost of purchased power, thereby driving up Muny Light’s operating costs. CEI illegally blocked Muny Light’s access to power from other companies, all in violation of federal antitrust law. As a condition of receiving its license to operate a nuclear power plant, CEI had to provide Muny Light with access to cheap power. Documents showed that CEI executives believed the purchase of Muny Light would increase CEI’s earnings by $2.732 a share, eliminate a competitive threat, and push the company’s growth rate to 10 percent, further enhancing investment.

Documents in the case also demonstrated CEI’s successful attempts to subvert media editorial policy through cunning use of the company’s large advertising budget. Over the years, several local reporters lost their jobs after writing reports unfavorable to CEI, and CEI bragged internally about placing verbatim company-written propaganda as general media editorial content.

Confronted with the federal finding that bolstered a previously filed $330 million antitrust damage suit, the Cleveland city administration’s response was incredible: “Now CEI has to buy Muny Light!”

At the same time the campaign to sell Muny Light accelerated, a high-powered rifle shot ripped through my house, just missing my head.

A cavalcade of media editorials commenced favoring the transfer of Muny Light to CEI.

During an ensuing legal battle over the validity of the referendum petitions, I became a candidate for mayor. I promised that if elected I would save the system. I won the election. My first act in office was to cancel the sale of Muny Light. I next had to pay off a $14 million CEI electricity bill that the previous administration owed and wanted to satisfy through the sale of the light system.

I had been in the mayor’s office barely a year, facing a municipal horror story of huge snow storms, massive water main breaks and a police strike. I had cut city spending by 10 percent through eliminating corrupt contracts, payroll padding and attritional cutbacks. Through the year, I struggled with a recall attempt for firing a police chief. The recall was backed by banks, utility and real estate interests with a last-minute appeal printed by the Plain Dealer to sell Muny Light. Credit rating agencies, which had looked the other way while CEI was attempting to gain Muny Light in the previous administration, downgraded the city’s finances.

Another Muny Light-related attempted assassination was averted when I was rushed to a hospital vomiting blood from a profusely bleeding ulcer. Some years later, a congressional investigation produced information from an undercover agent of the Maryland State Police that the assassination attempt was to occur while I was the grand marshal in a local parade. A local television investigative report claimed the assassin’s services were purchased because I refused to sell the electric system.

One month later, I was back at work trying to find a way to save Muny Light. The utility’s financial difficulties, though contrived largely through interference with the system by CEI, were depicted as so overwhelming that only the sale of the electric system itself would save the city from financial catastrophe. I held several meetings with bank officials. and it became clear we were heading for trouble on the question of refinancing. The banks were going to try to force me to sell the electric system. I went public with a plea for an income tax increase to protect the city’s solvency.

On Dec. 15, I made a last-minute appeal to Cleveland Trust. It was 8 o’clock in the morning. I met with Brock Weir, the chairman of Cleveland Trust, Council President Forbes and our host, a local businessman. I had the intention of protecting Muny Light and avoiding a default.

“There’s just one thing you’ve got to do,” said the Council president, who strongly favored the sale.

Weir, the bank CEO with the stern visage: “If you sell Muny Light, we’ll roll over the notes. I can get you $50 million in new financing. We’d get other banks to participate.” It was a bribe.

My thoughts went to the street just outside the boardroom. Some 20 years earlier, a few blocks from where this meeting was taking place, I slept with my brothers and sister and parents in a car, homeless. I remembered an apartment where my parents sat underneath the pale yellow light of a kitchen wall lamp, counting their pennies on an old porcelain-topped table. The pennies dropped, click, click, click. Pennies to pay the utility bills.

It matters how much people pay for electricity. It matters if the public owns its own system and has political and financial control over rates. I could hear the pennies dropping, click, click, click, as Mr. Weir insisted on the sale of Muny Light. I remembered my family and the struggles of people like them. I couldn’t do it. I couldn’t sell. Not for $50 million, not for anything.

“I’m not going to sell, even if it means my career,” I said, as Council President Forbes looked on in surprise.

“Why do you want to end your career? Sell the system. Get rid of it!” he said.

“Is there some other way we can work this out?” I asked Brock Weir.

He shook his head “No.”

Throughout that day, every media outlet in Cleveland echoed the sentiment of Cleveland Trust’s chairman, including the morning newspaper headline, with such depth of coverage and intensity that it seemed the city itself would crumble unless I agreed to the sale, which also included a provision dropping the $330 million antitrust damage suit.

The objective condition of the city’s finances received no honest review. The sale of Muny Light was depicted as the only way the city could avoid fiscal disaster. The majority leader of the City Council held a news conference live on the 6 o’clock news. He declared that if I sold Muny Light, “the chairman of the Cleveland Trust bank has informed the council that his bank will purchase $50 million worth of city bonds. So, in effect, we have a plan sitting on the mayor’s desk that will absolutely end the city’s financial problems, if he will put his signature on it.”

The $50 million bribe had been brought out into the open in a manner that now suggested it was a legitimate offer, a fake solution to a fake crisis. I refused to sell.

As Cleveland television stations covered the event live, with a countdown clock that looked like a twisted version of New Year’s Eve, midnight struck. Television networks of several countries recorded the grim event: The city of Cleveland became the first American city to go into default since the Great Depression. The default was over just $14.5 million dollars in credit.

When I called for a congressional investigation a few days later, Cleveland Trust denied it wanted Muny Light, CEI denied it wanted Muny Light, the council president denied the chairman of Cleveland Trust wanted Muny Light, and the majority leader said he was mistaken when he said live on the 6 o’clock news that the bank chairman offered $50 million in credit for Muny Light. Muny Light was no longer the issue. It was the mayor and his obstinacy that caused the crisis. So went the waltz into a netherworld devoid of truth, justice, reality or morality.

Though the people of Cleveland supported keeping Muny Light by a margin of 2 to 1 in a referendum a few months later, and passed an income tax increase by the same margin in order for the city to pay off the defaulted bond anticipation notes, the state of Ohio intervened and put the city into fiscal receivership. I lost the mayor’s race in 1979. The banks renegotiated the defaulted notes, at a profit. The city lost its antitrust suit against CEI in 1981, in a hung jury. An appeal failed.

I was out of major public office for almost 15 years until, in 1993, Cleveland announced an expansion of Muny Light (now called Cleveland Public Power). At that time, the City Council and others decided that I had made the right decision in refusing to sell Muny Light. The city and its residents had saved hundreds of millions of dollars through Muny Light’s reduced electric rates and the savings the taxpayers enjoyed from Muny’s lower-cost power for street lighting and city buildings.

I attempted another political comeback and this time succeeded, getting elected to the state Senate with the motto: “Because he was right.” My campaign literature showed a radiant light bulb behind my name. Two years later, I was elected to Congress, with the slogan “Light up Congress.” Today I am the chairman of the House Government Oversight Domestic Policy Subcommittee, which has broad jurisdiction over most government departments and agencies, including the Nuclear Regulatory Commission, and electric utility matters generally.

The Cleveland Electric Illuminating Co. is now a subsidiary of First Energy Co., which was fined by the NRC for various safety violations and, a few years ago, was found to have primary responsibility for the 2003 blackout that left 50 million people throughout the northeastern United States without electricity.

Cleveland Trust no longer exists. No other bank involved in the default survives, except for National City, which next week faces extinction through shareholder approval of a takeover by PNC bank. I have spent much time trying to save National City.

One newspaper, the Cleveland Press, which advocated that CEI be Cleveland’s sole electricity provider, ceased publication. The other strong proponent of the sale of Muny Light, the Plain Dealer, struggles to survive.

The city’s electric system endures and this past year celebrated its 100th anniversary.

AFTER READING THIS ARTICLE, PLEASE READ THE ARTICLE DIRECTLY BELOW IT (“THE CRUDE REALITY: CONFESSIONS OF AN ECONOMIC HIT MAN: HOW THE US USES GLOBALIZATION TO CHEAT POOR COUNTRIES OUT OF TRILLIONS”), WHICH IS ALSO POSTED ELSEWHERE ON THIS BLOG UNDER “Ecuador” and “Latin America”

NEW YORK (MarketWatch) — Fears are rising that Ecuador may default on its external debt, as a national audit commission has identified numerous irregularities in the country’s foreign debt and is likely to recommend Thursday for the suspension of payments.

The left-leaning government of President Rafael Correa chose not to pay the $30 million coupon on Ecuador’s Global 2012 bonds that was due Saturday and is now using the 30-day grace period to consider the legitimacy of its external debt.

The debt audit commission is due to present the full results of a year-long audit of Ecuador’s external debt Thursday.

The commission’s report has found “multiple irregularities in debt contracted between 1976 and 2006, such as double payments, abusive clauses, false justifications and negligence on the part of high-level government officials and multilateral institutions,” Patrick Esteruelas, an analyst at Eurasia Group, said in a note Wednesday.

Esteruelas, who has seen a copy of the audit report, said that it recommends that Ecuador suspend payments on all three of its global bonds, at least 45 multilateral loans and its debt to the Paris Club of international lenders.

“The government will likely use these findings to enter into talks with bond holders over restructuring terms, driving a very hard bargain that will hamstring any negotiations and could likely lead the government to default,” Esteruelas said.

Ecuador’s public external debt amounted to $10 billion in September, or 21% of gross domestic product, according to Eurasia Group.

Correa, who has been in power since January 2007, has vowed to implement a social revolution to improve the lives of the poor. Correa is a close ally of Venezuelan President Hugo Chavez, who is also pursuing socialist policies.

Ecuador is one of Latin America’s biggest exporters of crude oil, with the sector dominating the economy and accounting for about 60% of exports. As a result, the recent sharp slide in oil prices — from about $147 a barrel to $54 a barrel — is very negative for the country’s finances.

“I won’t give a probability, but I will say [debt default is] a material risk and that it’s unclear at this point what their true motive is and what the end result they are aiming for is,” said Nick Chamie, global head of emerging markets research at RBC Capital Markets.

“I’m not even sure they know that at this point. President Correa is probably trying to figure that out now,” Chamie said. “One very possible scenario could simply be that the government looks to extract significant concessions from its creditors and looks to reduce its debt burden. There may be a technical default, and in the end, what I expect is debt restructuring. “Ecuador’s ratings cut Moody’s Investors Service and Standard & Poor’s both cut Ecuador’s credit ratings Friday after Ecuador said that it would not pay the coupon on its Global 2012 bonds.

If the government indicates an intention to pursue a restructuring of its debt with bond holders during this period, S&P said it will likely lower the ratings to SD or selective default.

“The combination of sharply lower oil prices and an expected hit to economic growth resulting from lower exports and remittances is expected to pressure fiscal accounts in 2009,” said S&P credit analyst Lisa Schineller. “However, willingness, not capacity, to pay is currently the overwhelming credit weakness.”

Meanwhile, Moody’s downgraded Ecuador’s B3 foreign currency government bond rating to Caa1 and placed them on review for another downgrade. The agency said Ecuador has “ample liquidity” and the move by the government underscores its “poor willingness” to pay.

“It seems that the government’s stance towards bond holders is motivated by political and ideological factors, given the very small fiscal relief that a default would bring compared to the damage to the government’s ability to access international markets,” Alessandra Alecci, a senior analyst at Moody’s, said in a statement.

THE CRUDE REALITY: CONFESSIONS OF AN ECONOMIC HIT MAN: HOW THE US USES GLOBALIZATION TO CHEAT POOR COUNTRIES OUT OF TRILLIONS

“La Cruda Realidad” (The Crude Reality), Foto: Lou Dematteis

I regularly receive reports from www.amazoniaporlavida.org, an environmental organization that is waging a campaign to prevent exploitation of petroleum in Ecuador’s ecologically sensitive Yasuni region.

A recent e-mail made reverence to a former U.S. agent, John Perkins, who describes himself as a former “economic hit man,” in a tell-all book.

I found an interesting interview with Perkins on Amy Goodman’s “Democracy Now!” radio program, which sheds light on the problem as seen by today’s Ecuadorian environmental and anti-neoliberal activists.

First, my translation of the “Amazonia por la Vida” Report:

“In the Agenda of the United States and Its Intelligence Services”

When John Perkins was contracted by MAIN (a CIA front) to intervene in the political economy of Indonesia, Ecuador and Panama, he was told that by using macroeconomic statistics, he should be able, for example, to inflate the rate of economic growth in Indonesia from 6% to 19%.In the case of Ecuador, where he served as an economic advisor, he was told that, by manipulating its macroeconomic statistics, he should be able to put the country in debt to the point where they are trapped with the impossibility of repayment.

The CIA succeeded in manipulating Ecuadorian macroeconomic information to the point where in twenty years the country was in bankruptcy and had to over exploit and privatize its [natural] resources in order to deal with the debt.

In defining the statistics and the conditions of work in transnational corporations at that time [the 1970s] Texaco played an essential part.The former agent [Perkins] has revealed how Texaco was able to enter Ecuador via the Instituto Lingüístico de Verano [ILV, Summer Institute of Linguistics, a U.S. evangelical missionary organization, also known as the Wycliffe Bible Translators, with ties to the CIA], with whom he was also associated.

The CIA strategy was to establish the conditions for the re-taking of natural resources after they had been partially nationalized.Texaco, the company most affected, found itself in conflict with [Ecuadorian President] Jaime Roldós, who not only expelled the ILV from the country, but also refused the conditions to which Texaco aspired.After the assisination [ofRoldós], [his successor] Oswaldo Hurtado reinstated the ILV and Texaco began its greatest campaign of explorations (John Perkins, “Confessions of an Economic Hitman,” 2004).

(Table)

Evolution of the Total Ecuadorian External Debt (in millions of U.S. Dollars)

John Perkins, was a former respected member of the international banking community. In his book Confessions of an Economic Hit Man he describes how as a highly paid professional, he helped the U.S. cheat poor countries around the globe out of trillions of dollars by lending them more money than they could possibly repay and then take over their economies.

20 years ago Perkins began writing a book with the working title, “Conscience of an Economic Hit Men.”

Perkins writes, “The book was to be dedicated to the presidents of two countries, men who had been his clients whom I respected and thought of as kindred spirits–Jaime Roldós, president of Ecuador, and Omar Torrijos, president of Panama. Both had just died in fiery crashes. Their deaths were not accidental. They were assassinated because they opposed that fraternity of corporate, government, and banking heads whose goal is global empire. We Economic Hit Men failed to bring Roldós and Torrijos around, and the other type of hit men, the CIA-sanctioned jackals who were always right behind us, stepped in.

John Perkins goes on to write:

“I was persuaded to stop writing that book. I started it four more times during the next twenty years. On each occasion, my decision to begin again was influenced by current world events: the U.S. invasion of Panama in 1980, the first Gulf War, Somalia, and the rise of Osama bin Laden. However, threats or bribes always convinced me to stop.

John Perkins, from an interview with Amy Goodman on “Democracy Now!”November 9, 2004.

… I was initially recruited while I was in business school back in the late sixties by the National Security Agency, the nation’s largest and least understood spy organization; but ultimately I worked for private corporations.

… when the National Security Agency recruited me, they put me through a day of lie detector tests. They found out all my weaknesses and immediately seduced me. They used the strongest drugs in our culture, sex, power and money, to win me over. I come from a very old New England family, Calvinist, steeped in amazingly strong moral values. I think I, you know, I’m a good person overall, and I think my story really shows how this system and these powerful drugs of sex, money and power can seduce people, because I certainly was seduced. And if I hadn’t lived this life as an economic hit man, I think I’d have a hard time believing that anybody does these things

Basically what we were trained to do and what our job is to do is to build up the American empire. To bring—to create situations where as many resources as possible flow into this country, to our corporations, and our government, and in fact we’ve been very successful. We’ve built the largest empire in the history of the world. It’s been done over the last 50 years since World War II with very little military might, actually. It’s only in rare instances like Iraq where the military comes in as a last resort. This empire, unlike any other in the history of the world, has been built primarily through economic manipulation, through cheating, through fraud, through seducing people into our way of life, through the economic hit men. I was very much a part of that.

Well, the company I worked for was a company named Chas. T. Main in Boston, Massachusetts. We were about 2,000 employees, and I became its chief economist. I ended up having fifty people working for me. But my real job was deal-making. It was giving loans to other countries, huge loans, much bigger than they could possibly repay. One of the conditions of the loan—let’s say a $1 billion to a country like Indonesia or Ecuador—and this country would then have to give ninety percent of that loan back to a U.S. company, or U.S. companies, to build the infrastructure—a Halliburton or a Bechtel. These were big ones. Those companies would then go in and build an electrical system or ports or highways, and these would basically serve just a few of the very wealthiest families in those countries. The poor people in those countries would be stuck ultimately with this amazing debt that they couldn’t possibly repay. A country today like Ecuador owes over fifty percent of its national budget just to pay down its debt. And it really can’t do it. So, we literally have them over a barrel. So, when we want more oil, we go to Ecuador and say, “Look, you’re not able to repay your debts, therefore give our oil companies your Amazon rain forest, which are filled with oil.” And today we’re going in and destroying Amazonian rain forests, forcing Ecuador to give them to us because they’ve accumulated all this debt. So we make this big loan, most of it comes back to the United States, the country is left with the debt plus lots of interest, and they basically become our servants, our slaves. It’s an empire. There’s no two ways about it. It’s a huge empire. It’s been extremely successful.

[I worked] … very closely with the World Bank. The World Bank provides most of the money that’s used by economic hit men, it and the I.M.F.

“Omar Torrijos, the President of Panama. Omar Torrijos had signed the Canal Treaty with Carter much—and, you know, it passed our congress by only one vote. It was a highly contended issue. And Torrijos then also went ahead and negotiated with the Japanese to build a sea-level canal. The Japanese wanted to finance and construct a sea-level canal in Panama. Torrijos talked to them about this which very much upset Bechtel Corporation, whose president was George Schultz and senior council was Casper Weinberger. When Carter was thrown out (and that’s an interesting story—how that actually happened), when he lost the election, and Reagan came in and Schultz came in as Secretary of State from Bechtel, and Weinberger came from Bechtel to be Secretary of Defense, they were extremely angry at Torrijos—tried to get him to renegotiate the Canal Treaty and not to talk to the Japanese. He adamantly refused. He was a very principled man. He had his problem, but he was a very principled man. He was an amazing man, Torrijos. And so, he died in a fiery airplane crash, which was connected to a tape recorder with explosives in it, which—I was there. I had been working with him. I knew that we economic hit men had failed. I knew the jackals were closing in on him, and the next thing, his plane exploded with a tape recorder with a bomb in it. There’s no question in my mind that it was C.I.A. sanctioned, and most—many Latin American investigators have come to the same conclusion. Of course, we never heard about that in our country.”